Institutions promote growth--this view now holds firm ground. The
task then is to 'engineer' growth promoting institutions.
Endogeneity characterises institutions, for example, groups enjoying
political power influence economic institutions but political power
itself is a function of wealth. The question then is: what to reform
first? History stands witness that generally the societies with extreme
inequality and a heterogeneous population tend to evolve institutions
that restrict access to economic opportunities for the poor which in
turn constrains economic development. On the other hand societies with
greater equality and homogeneous population typically enjoy
growth-promoting institutions. (1) Institutional reforms should
therefore begin with institutions that serve to create or perpetuate
inequality and heterogeneity in the society. We argue that the four
different kinds of educational systems in operation in Pakistan are a
major source of creating and perpetuating inequality and heterogeneity
in the population. Access to a single and common educational system will
open-up similar opportunities of higher education and job attainment tar
all the citizens, thereby reducing inequality. Diverse educational
systems promote different sets of beliefs while a uniform system forges
belief-convergence in the society that in turn facilitates agreement on
a common set of institutional reforms. Therefore it is the educational
system that should be the first to reform. We also argue that in
Pakistan, unlike some European countries in the 17th century, neither
commercial interest nor fiscal constraints can force the de jure power
to reform institutions. Typically, large commercial interests in
Pakistan have thrived on favours from the de jure power and therefore
have no interest in changing the system. Foreign aid eases the fiscal
constraints from time to time relieving government of the need to reform
institutions. The thought of a revolution of some kind is still a far
cry, the society having no such inclination. The alternative then is the
gradual approach preferred by North, Acemoglu and Rodrik. (2) This
gradual approach suggests the area of educational reforms.

The role of history in shaping economic outcomes is being
increasingly examined. (3) One view is that important events in the
history of a nation shape its institutions that in turn determine its
economic performance. A country endowed with poor institutions, performs
poorly. The question is how a country can break loose of the historical
factors to begin the process of institutional reform and thus place
itself on the track of economic progress. What we need to know is that
whether it is possible to reform all institutions in one go--the big
bang approach, or if the institutions can be reformed only
gradually--one, or at best, few at a time. If one favours the gradualist
approach, then the obvious question is what to reform first, that is,
where to begin'?

Concisely speaking institutions represent 'rules of the
game' or "humanly devised constraints that shape human
interaction" [North (1990)]. They have also been defined as
"actual organisational entities, procedural devices, and regulatory
frameworks" [WEO (2003)]. The most widely cited definition in
literature is again from North (1981)--% set of rules, compliance
procedures, and moral and ethical behavioural norms designed to
constrain the behaviour of individuals in the interests of maximising
the wealth or utility of principals". He terms formal rules,
informal constraints and the enforcement characteristics of the two as
the complete set of institutions.

The view that institutions represent the rules of the game holds
firm ground. (4) No society is devoid of institutions, however many have
poor institutions. Then how does a society gets institutions that
promote economic growth? Acemoglu, et al. (2005a) argue that
institutions are endogenous--political institutions influence economic
institutions and vice versa. For example, political institutions,
whether democratic or autocratic, determine who enjoys political power.
Who gets access to economic opportunities--masses or the elites, is
determined by the political power and hence political institutions.
However who makes it to the echelons of power, especially in developing
countries, is in part determined by wealth, and therefore economic
institutions. Given the endogeneity, an attempt to move from one set of
institutions to another, for example, from autocracy to democracy, may
be successfully thwarted by the would-be losers. For example monopolies
(economic institutions) supported by the autocrat may thwart market
oriented reforms, if the monopolist or the autocrat himself is deriving
rents from their prevalence. The endogeneity problem tempts one to
suggest that institutions can only be reformed with a big bang--reform
all institutions in one go, perhaps through a revolution. However this
leaves us with the problem of how to stage a revolution. Successful
revolutions typically are preceded by a certain thought-process [Masood
(1991)] which at times may spread over a century. For example, the
European enlightenment thought, beginning as far back as 16th century,
preceded the revolutions of UK (1688), US (1787) and France (1789). Even
when it becomes possible to stage-manage a revolution, the
post-revolution institutional changes may not be too revolutionary.
North (1990) has quoted examples from history to show that
post-revolution institutional changes exhibit the legacy of the past.

If one were to practice gradualism, reforming institutions one by
one, the question arises, what to reform first? What conditions should
an institution satisfy to top the agenda of institutional reform? To
prescribe such conditions the knowledge of the historical sources that
had constrained the development of growth-promoting institutions is
essential. Based on implicit evidence for India, (5) with whom Pakistan
shares a common colonial heritage, we subscribe to the Engerman and
Sokoloff (2005) view that initial inequality and population
heterogeneity are the sources of path-dependence exhibited by the
institutions.

In this context, Gazdar (2004) explains how the land tenure
arrangements put in place during the colonial rule over the areas that
now form Pakistan served to create inequality. He convincingly argues
that first the land tenure arrangements like Royatwari in Sindh and
Mhalwari in Punjab (6) sought to create a landholder-advantage and then
the canal colonisation highly skewed the power configuration in favour
of the landlords. Ali (1988) also provides exhaustive evidence that
canal colonies developed during the colonial rule over India in western
Punjab, now the most populous province of Pakistan, served to create
inequality and heterogeneity in population. Later on, the development
policies pursued in the 1950s and 1960s not only served to perpetuate
but further widen the income inequality that prevailed then. To
understand how inequality and heterogeneity is casting an adverse
influence on development, one has only to look at how influence has been
very recently used to divert the natural flow of flood waters to save
the agricultural land and residential estates the of landed elites. (7)
The endless controversy over construction of Kalabagh dana, presence of
regional political parties with votes in specific communities and host
of religious parties drawing inspiration from different factions of
Islam, are sources of heterogeneity, to name a few.

With this background in mind, we can lay down the criteria for the
choice of the institution to be reformed, first and foremost. Our
criteria are: (i) Inequality and heterogeneity in population being the
source of path-dependence, the institution to be reformed first should
serve to reduce inequality and heterogeneity in the population; (ii) the
institution selected to be the first should be the one that would face
relatively lesser resistance from other institutions or whose reform
will not be constrained by the absence of some other institution; (iii)
its impact should be all encompassing and long-lasting. Regarding
condition (ii), we emphasise at the outset that the condition of
'relatively lesser resistance' by no means implies that we
expect to find an institution that will meet little resistance from the
stakeholders--the relative nature of the phrase should not be lost sight
of. For example suppose that the level of discontent with the de jure
power is such that to thwart an attempt by the citizens to secure a
change in power structure, the existing de jure power, must do one of
the two: curb rent-seeking or reform the educational system to
adequately groom the populace. Which one would the rulers choose;
naturally the latter. Why? The former would hurt them now while the
latter would hurt them, at best, a generation-hence. Path dependence
being an essential feature of institutions, these are difficult to
change. Given the difficulty, the cost of change is high. Only an
all-encompassing and long-lasting impact would justify the costs
involved. Hence the condition (iii) prescribed above.

The Paper is organised as follows: In Section 2 we review the works
of Douglas North, Darron Acemoglu and Dani Rodrik. Section 3 examines
the comparative experiences of institutional change (or non-change) of
17th century Britain and Netherlands versus France and Spain, 19th
century Britain and Germany versus Austria and Russia, 18th and 19th
century North America versus South America, and Korea and Taiwan versus
Congo in the 20th century. Section 4 contains a 'brief' on
enlightenment era, the objective being to show to what extent the
institutional evolution, has benefited from the thoughts of
enlightenment philosophers. Based on the lessons drawn from the theories
discussed in Section 2, the historical experiences discussed in Section
3, and the thoughts of enlightenment philosophers reviewed in Section 4,
the discussion in Section 5 is devoted to the primary objective of the
paper--where to begin the process of institutional reform? Section 6
concludes the paper.

2. THEORIES OF INSTITUTIONAL CHANGE

1. Douglas North (8)

The key elements of North's theory of institutional change
are: (i) The process of development of human perceptions and beliefs;
(ii) those whose beliefs matter; (iii) intentionality and comprehension
of the issue by those whose beliefs matter; and (iv) path dependence
exhibited by the institutions. These are only the building blocks in the
process of institutional change. The element, in North's framework,
that triggers the change in institutions is the change in bargaining
strengths of the parties to the contract.

2.1. Process of Institutional Change

To understand the process of institutional change let us begin from
the state of institutional equilibrium. Institutions being rules of the
game reflect a contract between two parties. The institutional
equilibrium prevails when parties to the contract do not want to alter
the terms of the contract [North 1990)]. The state of institutional
equilibrium does not essentially imply that the parties are satisfied
with the terms of the contract, rather, it only reflects that given the
costs and benefits involved in altering the terms of the contract, the
parties do not consider it worthwhile to devote resources towards
changing the terms. To illustrate this, assume that the majority of the
populace of a country feels that the de jure power has persistently
failed to enforce the terms of the contract, in letter and spirit, i.e.,
it has failed to implement the constitution. Given this failure, the
public wants a change in the de jure power. Further, assume that the
desired institutional change is possible only if the masses rise against
those who currently wield the de jure power. This will require some
sacrifices on the part of the masses and may entail retaliation as well
from the de jure power. Sacrifices involve putting in one's time,
effort and money. The retaliation may take the form of arrests, loss of
government job, and in extreme cases, getting injured or even losing
one's life in a violent protest. Given this scenario, the citizens
will devote resources towards institutional change only if the perceived
benefits from the change are greater than the costs involved [North
(1990)]. For example, if the citizens subscribe to the view that a
change in de jure power will not affect their lives or, at best, the
effect would be cosmetic, then they will not strive for a change in de
jure power--masses in Pakistan, who, despite being dissatisfied with the
performance of the wielders of de jure power have not actively worked
for change, seem to subscribe to this view.

A noteworthy element of North's framework is that it is only
the perception of costs and benefits of bringing about an institutional
change that matter--the agents' decision does not depend on that,
which can be observed, though only ex post. As such, the costs and
benefits have to be assessed. This implies that agents can be lured to
undertake efforts towards institutional change by exaggerating the
expected benefits and underplaying some of the expected costs. The
exaggeration of costs on the other hand would discourage the agents to
work for a change.

So far we have determined that institutional change is a function
of change in human perceptions that ultimately translate into beliefs.
Therefore to manage an institutional change by design, it is the beliefs
system that should be influenced in a manner which is conducive to
achieve the desired institutional change. The crucial question here is
if it is possible to influence the belief system of a people, and if
yes, to what extent and how quickly. This brings us to the second key
element of North's theory of institutional change: the process of
belief formation.

2.1.1. Formation of Perceptions and Beliefs

North argues that "institutions impose constraints on human
behaviour", therefore, a theory of institutional change will focus
on human behaviour. North (2005) rightly delves deep into psychology to
understand the process of belief formation. He concludes that human
perceptions transform into beliefs, but perceptions themselves depend
upon learning. North draws upon the work of a number of psychologists to
understand the learning process. One view is that the learning process
is guided by epigenetic rules--the development of an organism under the
joint influence of heredity and experience. However the exact
composition of genetic predisposition and experience remains a moot
point. A similar view is that three sources, viz. genetics, cultural
heritage and environment contribute to learning. The role of these
sources in the process of learning is discussed below:

The genetic predisposition of an individual is composed of what
North (2005) calls the artifactual structure (i.e. foundation) which is
transmitted from generation to generation. North views the informal
norms to be the most important carrier of this artifactual structure,
though the structure comprises formal rules as well. He suggests that as
changes occur in the human environment, these are gradually assimilated
into the socio-cultural-linguistic inheritance and are embodied in the
foundation.

According to Hayek (1960), cultural evolution, the second source in
North's process of learning, consists of intergenerational transfer
of knowledge, values, and attitudes etc., that have accumulated through
the Darwinian process of evolution. Thus a society's culture
incorporates the distilled experience of the past, more than what a
single person can accumulate in his life time. Given the contribution of
past knowledge, values and attitudes to the prevailing culture, a
cultural change would be very difficult to bring about. Culture can be
manipulated by design only to the extent of what the present day
knowledge and experience can contribute to it. A certain fractional
change in culture will occur in a generation's time depending upon
the kind and quantity of knowledge that the society chooses to gain and
the experiences that it has to pass through today, or by the act of
others or by the will of nature. The process of cultural change is
therefore, without doubt, highly incremental.

As to the contribution of human environment, the third source of
learning, North again prescribes a slow evolutionary process. He says
that "if the mind has been programmed by millions of years of
hunter/gatherer tradition then the flexibility to adjust to a very
different modern world may be very limited, as implied by evolutionary
psychologist. The reason why change in environment is a slow
evolutionary process is that millions of years of hunter/gatherer
tradition cannot be altered by one-off experience--a steady stream of
experiences is required to affect the change". However given John
Locke's view on empiricism (htrp://www.wsu.edu:8001/-dee/ENLIGHT/),
the environment can be influenced through education or, to speak more
broadly, by creating the desired kind of awareness, even if Locke's
stipulation about human mind being tabula rasa (i.e. erased board) at
birth does not hold true.

Thus, institutional change being a function of change in beliefs,
in order to design a conscious institutional change, we shall have to
influence what a person learns. Therefore education is at the heart of
the matter. No wonder that the countries that boast of good institutions
today have been placing emphasis on education for long. For example, in
the United States over 40 percent of the school-age population had been
enrolled in schools and nearly 90 percent of the white adult males were
literate by around 1850. Similarly schooling was also widespread in
Canada by early nineteenth century [Engerman and Sokoloff (2005)]. The
influence of education on institutional change is discussed more
comprehensively later on.

2.1.2. Dominant Beliefs

North (2005) emphasises time and again that institutions depend
upon beliefs or the subjective mental constructs that the agents
possess. He asks upon whose beliefs the choice of institutions is
incumbent, and answer himself, that it is the dominant beliefs, the
beliefs of those who are in a position to enact institutional change,
that matter. North's view that it is the 'dominant
beliefs' that matter, implicitly builds upon his own earlier view
[North (1990)] that the change in relative prices alters the bargaining
strength of the parties to the contract. The party enjoying greater
bargaining power attempts to alter the contract. This is to say that the
beliefs of the dominant players matter.

2.1.3. Intentionality and Comprehension of the Dominant Players

North (2005) argues that it is not just the dominant beliefs that
matter but the intentionality, and comprehension of the issue, of the
dominant players, i.e., the mental construct of the players also
matters. He goes on to suggest that the world economic growth has
remained sporadic throughout history because either the players'
move was never intended to maximise social welfare or the flawed
comprehension of the issue has caused the results to deviate from
intentions (North, 2005).The rise and fall of the socialist Soviet Union
is a case in point where perhaps the intention were correct but the
dominant players failed to comprehend the issue in its totality. The
case of intentionality can be seen in Pakistan's domestic
environment. Laws have been enacted in the recent past to grant
independence to SBP. However the tenure of its governor has been fixed
at three years that is renewable for another term of three years. The
point to note here is that the tenure of the government is five years.
How can a governor who must seek renewal of tenure for another term from
an incumbent government show independence in policy making? Another case
in point is the ongoing debate over whether or not the Chief Justice of
Supreme Court, deposed by former military dictator, be restored. (9)

2.1.4. Path Dependence

The most important element in North's theory of institutional
change is path dependent which is the resemblance of today's
institutions to yesterday's. To reiterate, it's the beliefs
system that decides the kind of institutions that a society will choose.
Given the painfully slow learning process, described above, that
influences the belief system, it is only natural to expect that
institutions will exhibit, what the literature on institutional
economics terms path dependence--resemblance to the institutions of the
yesteryears. There are three important sources of path dependence; (i)
increasing returns to scale; (ii) informal rules; and (iii) the
organisation's that owe their existence to existing institutional
arrangement.

North (1990) argues that institutions exhibit increasing returns to
scale which makes the change in institutions difficult. He explains that
three sources make the returns to institutions increasing in nature: (i)
Initial set up costs, (ii) coordination effects, and (iii) reduction in
uncertainty. North explains that when institutions are created de novo,
organisations incur costs to learn and adapt their behaviour to the
existing institutional framework. Overtime, the organisations learn and
evolve to take advantage of the opportunity set offered by the existing
institutional framework. This learning and adaptation, cuts down the
unit cost of operating within the current institutional framework.
Secondly, there are positive coordination effects, directly through
contracts with other organisations, and indirectly through investment in
complimentary activities by the State. Finally, contracting more and
more under specific institutional framework reduces the uncertainty
about the permanence of the rule. This makes the parties to the contract
more comfortable with the existing institutional matrix. These three
elements jointly make the returns to institutions increasing in nature.
The increasing returns to institutions in turn create organisations and
interest groups that enjoy a stake in maintaining the existing
institutional matrix because the change would affect them adversely.

Besides the increasing returns, another source of path dependence
is the informal norms, an important component of the institutional
matrix. While the formal rules can be changed with a stroke of the pen,
informal rules are more difficult to change. Pejovich (2006) eloquently
lays down the formation process of informal rules. He argues that as
human beings interact to survive, some interactions are repeated over
and over again, not the least because the public understands their
utility but simply because these have worked. Eventually the
interactions that pass the test of time are institutionalised into
taboos, traditions, moral values, beliefs etc. To explain the process of
change in informal institutions, Pejovich argues that when a person or a
community develops a new idea, this enlarges the opportunity set of
human interaction. If the new exchange opportunities call for a
behaviour which is not in conformity with the established ethos, the
community would consider the behaviour of those exploiting the
opportunities as sub marginal, and therefore, the community may react
with sanctions like ostracism etc. However, if the returns are high
enough to sustain a large number of repeated interaction (between more
and more groups) relative to costs (including sanctions) the success of
new activities would force adjustment in the set of informal
institutions. Such adjustment may include the addition of new norms to
the set of informal institutions, change in an old norm or simply
ignoring an otherwise established norm. It is the painfully slow process
of change in informal rules that makes the overall institutions path
dependent. The process of formation of informal rules laid down by
Pejovich confirms the path dependence argued by North and gradualism in
institutional evolution favoured by Rodrick (2006).

Finally, institutions may exhibit path dependence because some of
the organisations born out of existing institutional matrix (the
combination of formal rules, informal constraints and enforcement
characteristics of the two) may owe their very existence to that
specific institutional arrangement; and a drastic change in such an
institutional arrangement may sound a sudden-death for the organisation.
Therefore existing organisations will attempt to block institutional
change.

To sum up, the increasing returns to institutions, preferences of
the organisation born out of current institutional matrix and the
informal rules together conspire to make the change in institutions
highly incremental and the institutions path-dependant. North cites
various examples to support his views on path dependence e.g., the US
constitution, Common Law and the North West Ordinance in the US. In
Pakistan we refer to a number of institutions e.g., Land titling [Kardar
(2007)] and Civil Service [Haque and Khawaja (2007)] as legacy of our
colonial past.

2.1.5. Lessons from Douglas North

The key lesson from North is that path dependence makes it
difficult for institutions to change and that any long lasting change
must be incremental. North's emphasis upon institutions being a
function of belief system provides room for designing an institutional
change by influencing the belief system. His view that beliefs and the
dominant players 'ability to comprehend an issue matter, calls for
influencing their beliefs and improving their comprehension. However,
since it is difficult to predict who would be the dominant players a
generation hence, a long-lasting institutional change would call for
influencing the beliefs and improving the abilities of all and sundry to
correctly comprehend an issue at hand. More importantly, influencing the
beliefs of all, rather than a few, is required to secure homogeneity in
the population. This homogeneity would in turn facilitate agreement on a
common set of institutional reforms [Egerman and Sokoloff (2005)]. How
is homogeneity in beliefs to be secured, is the subject matter of
Section 5.

2.2. Darron Acemoglu

Different set of institutions may induce a different kind of
resource allocation; some institutions would allow competitive forces to
play their role while others would promote rent seeking. So for
individuals to prefer one set of institutions over another is but
natural." Acemoglu, et al. (2005a) argues that given the preference
of different individuals over different set of institutions, the group
with the greater political power is likely to secure the institutions of
its choice. (This is similar to North's viewpoint that belief of
the dominant players matter or that the bargaining strengths of the
players matter).

Acemoglu, et al. (2005a) argues that an ideal course for the groups
with conflicting interests would be to agree over the set of
institutions that maximise aggregate growth and then use their political
power to determine the distribution of gains. In practice, groups with
conflicting interests do not follow this course. The reason is that
there are commitment problems inherent in the use of political power
i.e., a monarch or a dictator cannot credibly commit against use of
power to his advantage. A monarch or a dictator enjoying absolute power
may promise today to respect property rights but in furore nothing would
restrain him to renege on his promise. Citing the case of UK, Acemoglu,
et al. (2005a) states " institutional changes in England as a
result of Glorious revolution, of 1688 were not simply conceded by the
Smart kings. James II had to be deposed for the changes to take
place".

Acemoglu, et al. (2005a) suggests that the distribution of
political power in society is endogenous. It is the political
institutions, for example, monarchy or democracy, that determine who
holds the de jure power. However, some individuals or groups, though not
allocated power by political institutions, may still enjoy de facto
power because of their ability to revolt, hold strikes (by trade
bodies), hold protests (peaceful or violent), use military power, clergy
power or mercenaries etc., to impose their will upon the society. The de
facto power of a group largely depends upon the economic resources that
it enjoys, which determines its ability to use force and influence the
de jure power. It is often the de facto power that forces a change in de
jure power. Acemoglu, et al. (2005a) asks why the de facto power does
not settle for getting institutions of its choice from the de jure power
but insists on changing the de jure power itself. Drawing upon the works
of Lichbach (1995), Tarrow (1991) and Ross and Gurr (1989), the authors
answer that de facto power is often transitory in nature. Not being sure
that its power will continue unabated, it wants to transform the de jure
power in a manner that it will continue to work in conformity with the
beliefs of the de facto power even after it has ceased to exist.

2.2.1. Lesson from Acemoglu

The lesson then from Acemoglu is that change depends upon the
relative bargaining strengths of the de jure and de facto powers.
Suppose that the bargaining strength of de jure power is greater and the
existing institutions are poorer, then in this case the institutions
will remain poor. However if the bargaining strength of the de facto
power is greater and the existing institutions are poorer, the de facto
power then will force the de jure power to provide institutions of their
choice. The de jure power will either yield in favour of institutional
change or will be replaced, no matter what modus operandi is adopted by
the people who share the beliefs of the de facto power. The bottom line
then is that institutional change will have to wait for the emergence of
de facto power that can force the de jure power to yield. The question
then is, can the emergence of the requisite de facto power be designed.
We take up this question in Section 5.

2.3. Dani Rodrick

Rodrick illustrates the process of institutional development by
equating institutions with technology that transforms primary endowments
of a society into a larger bundle of outputs. He explains that the
requisite technology could be either general purpose or highly specific
to local needs. He further argues that if the technology (institution)
is general purpose in nature and is easily available on the world
market, then it can be adopted by simply importing a blueprint from the
developed countries (or any country whose institutions are considered
good). However, if the technology is specific to local conditions, which
is more often the case, then technology would evolve by trial and error.
This suggests that a society is able to build institutions, only
gradually. Rodrick argues that one reason why gradualism prevails over
the blue print approach is that much of the technology is tacit and
therefore not available in black and white. This makes the blue print
highly incomplete and of little use to the importers. However, Rodrick
feels that imported blue prints can prove useful for some narrowly
defined technical issues, but large scale institutional development, by
and large, calls for discovering local needs and developing rules that
serve such needs.

2.3.1. Lesson from Dani Rodrick

Rodrik's emphasis upon gradualism is akin to North's path
dependence. Secondly, Rodrik's view, that imported blue prints have
limited usefulness and that for large scale institutional change to
happen, local needs must first be discovered, tells us that foreign
consultants charged with suggesting reform of local institutions may not
be ideally suited to do the task.

3. INSTITUTIONAL CHANGE: HISTORICAL EXPERIENCES (10)

3.1. 17th Century Britain and Netherlands versus Spain and France

The institutions in Britain and Netherlands on the one hand, and
Spain and France on the other hand took divergent paths in late 17th
century--while Britain and Netherlands moved towards institutions that
promoted commercial activity, Spain and France moved towards extractive
institutions. Acemoglu, et al. (2005a) argues that whether or not the
institutional change occurred depended upon how powerful the groups
demanding institutional change were?

The rise of the constitutional monarchy in Europe is instructive.
The following scene prevailed in the early sixteenth century UK. From
1603 onwards, England was ruled by Stuarts who continuously had revenue
problems. To generate revenue the Crown sold lands, extended monopoly
rights, seized private property and defaulted on loan repayments. The
Parliament, though in existence, enjoyed little say in affairs of the
country and the Crown could dissolve the assembly even upon minor
differences with the Parliament. Supreme judicial power rested with the
Star Chamber, which held legislative powers too, and primarily
represented the Crown's interests. This was Britain prior to the
Civil War of 1646. The Civil War and then the Glorious Revolution of
1688 led to sweeping changes in institutions; the Star Chamber was
abolished, restrictions were placed on monopolies, cases involving
property were to be tried under Common Law and the Parliament was to
have regular standings. The Parliament gained a central role in
financial matters with exclusive powers to raise taxes. This also gave
more security to property rights of all and sundry, especially to the
rights of those with financial and commercial interest. In sum, UK was
transformed into a parliamentary monarchy with powers of the Crown
significantly trimmed. The question that begs the answer is, how could
the commercial interest become so strong in Britain. Acemoglu, et al.
(2005a) argues that the Lords had gained a stronger position during the
14th and 15th century and were able to force the creation of the
Parliament, to put limits to the authority of the Crown (but certainly
not to protect the commercial interests). The Lords forced the Crown to
'live on his own' with strict restrictions on expanding his
revenues. Perhaps these restrictions later on enabled the commercial
interests to become stronger and demand more rights.

The 16th century Netherlands was the most important commercial area
of Europe. The powerful groups in the country were for encouragement to
commercial activity and enforcement of property rights. Netherlands,
being under Spanish control then, provided substantial revenue to the
Spanish Crown. Economic development in Netherlands threatened the
interest of Spain. The towns in Netherlands, under the leadership of
William of Orange, rebelled against Spain, leading to Dutch independence
in the 16th century. What is important is the fact that the merchants of
Netherlands wholeheartedly financed the rebellion.

An explanation put forth by Acemoglu, Johnson, and Robinson (2005b)
for the transformation of Britain and Netherlands is that in the 16th
century the opportunities generated by 'Atlantic trade' had
increased the wealth and therefore the political power of the commercial
interests. This enabled them to demand and obtain more rights.

This brings us to the question as to why, out of the countries
involved in 'Atlantic trade' only the commercial interests in
Britain and Netherlands were able to enrich themselves from the
opportunities generated by the trade, while the commercial interests in
France and Spain could not exploit such opportunities. Acemoglu, et al.
(2005b) provides the answer. The authors explain that in England and
Netherlands the trade was mostly carried out by individuals and
partnerships, while in France and Spain, trade was primarily under the
control of the Crown. The differences in organisation of trade in turn
reflected the different political institutions of these countries. Grant
of trade monopolies used to be an important source of fiscal revenues
for the Crown; the more powerful monarchs could increase their revenues
by granting trade monopolies or by directly controlling trade while for
weaker monarchs this was a luxury they could not afford. At the
beginning of the fifteenth century, the Crown was much stronger in
France and Spain, than in Britain and Netherlands, and this was the most
important factor in the difference in organisation of trade in these
countries. Consequently, in England and Netherlands, and not in France
and Spain, a new class of merchants arose with interests directly
opposed to the interests of the Crown. The new class of merchants later
on played an important role, as described earlier, in subsequent
political changes.

3.1.2. Lessons from the Institutional Evolution in Britain and
Netherlands versus Institutional Evolution in Spain and France

Two lessons are apparent from the historical comparison of Britain
and Netherlands with France and Spain. One, strong commercial interests
hold the potential to emerge as de facto power that may successfully
challenge the de jure power if the latter fails to provide the
institutions that commercial interests require. We learn from the
European history that more often than not, the de facto power that
emerged in the form of commercial interest had to force a change in the
de jure power to acquire the institutions of its choice.

The second lesson is that the fiscal constraints may force the
authorities to strike a bargain with the citizens with the effect that
the public provides for the fiscal needs of the government which in turn
provides good institutions, the institutions that the public prefers.
This incidentally is the thesis of Moore (2002) who argues that nations
that enjoy recourse to unearned income (i.e. income from natural
resources and foreign aid) typically have to put up with poor
institutions while the countries that rely mostly on earned income (from
taxation) have relatively good institutions. To account for the
difference, Moore argues that to induce the citizens to pay taxes the
authorities have to provide them with good institutions and the citizens
view taxes as the cost of such institutions. However, since the rulers
of the nations with unearned income do not have to lean on citizens for
revenues, therefore, they are not constrained to provide good
institutions.

3.2. 19th Century Britain and Germany vs. Austria-Hungary and
Russia

During the 19th century, Britain and Germany went through rapid
industrialisation in contrast to the industrialisation process in
Austria-Hungary and Russia. To account for the difference, Acemoglu
(Lecture Notes, p. 200) argues that the elites in Britain had relatively
more to gain from industrialisation than those in Austria-Hungary and
Russia. Besides, while the landed aristocracy in Britain enjoyed
relatively secure position and was less threatened by the process of
industrialisation, the aristocracy in Austria-Hungary and Russia stood
to lose more rents if they lost political power.

The lesson from the above is all too familiar--the rent-seekers
will thwart institutional change with success depending upon the
bargaining strength that they enjoy.

3.3. North vs. South America in the 18th and 19th Century

In the 18th century, some Caribbean and Latin American countries
were richer than North America. However, while North America
industrialised rapidly in the 19th century, the Caribbean Islands and
much of South America stagnated during the period. Acemoglu (lecture
notes) argues that the powerful groups in North America generally
favoured policies that encouraged commercial interests and
industrialisation, while in the Caribbean and South America the groups
in power opposed industrialisation.

To account for the difference in institutional and economic
development of North and South America, Engerman and Sokoloff (2005)
argue that it is the initial conditions or endowments of a country that
play a fundamental role in determining the long run paths of development
of a country. The basic import of their thesis is that the colonies in
the Americas that began with extreme inequality and population
heterogeneity, developed institutions that restricted access to economic
opportunities and contributed to lower rates of public investment in
schools and infrastructure, thus beginning a vicious circle of
underdevelopment. The authors argue that the climate and the soil of the
colonies like Brazil and the Caribbean were suitable for growing cash
crops like sugarcane. These crops enjoyed large scale economies and were
most efficiently grown using slave labour. The colonial masters in these
countries imported slave labour from the international market for slaves
and thus the population of these countries came to be dominated by slave
labour. This led to highly unequal distribution of wealth, human capital
and political power. South America was attractive for European
colonisers because of the potential huge return that use of slave labour
afforded. On the other hand, the areas that now constitute North America
and Canada, were not very attractive to the Europeans when they began to
colonise the New World (Americas). This was because the climate and soil
of the areas was suitable only for the production of grains and
livestock that involved small scale economies and used few slaves. When
the opportunities in the South were close to exhaustion, the Europeans
began to colonise North America and Canada. Since the land was abundant
and labour scanty, the colonisers offered various incentives to
encourage the migration of European citizens to the United States and
Canada. Engerman and Sokoloff identify three historical institutions
that were designed to attract European settlers to the areas. These
included adult male franchise, schooling and ownership of land.
Accordingly much greater percentage of the rural population in United
States and Canada owned the land that they cultivated and landholdings
were typically smaller. Similarly a far greater percentage of the
population enjoyed access to schooling in the United States and Canada
than in Latin America. Thus, argue the authors, the institutions that
promote growth were necessitated by the homogeneous character of the
population in the United States and Canada.

To further argue for belief-homogeneity as a facilitator of
institutional change, we refer to Collier (2007). The author stresses
that even autocracies are less stable in ethnically diverse societies.
The reason is that, in ethnically diverse societies only one of the many
groups will be aligned to the autocrat. Given the narrow support base of
the autocrat, his support group can engage in rent-seeking or this may
induce the autocrat to dole out favours to the opposition. All this
constrains institutional change.

The comparison reveals that initial endowments of a country or
region influence institutional evolution. The societies that begin with
extreme inequality and population heterogeneity tend to have
institutions that restrict access to economic opportunities, while the
societies with relative equality and population homogeneity are more
likely to facilitate the evolution of growth enhancing institutions.

The comparison of North and South America also highlights the
primacy of economic interests and also, as to who enjoys power--those
with interest in rent-seeking or those with interest in secure property
rights. If the de jure power is with the aristocracy, it will not
establish good institutions on its own. The good institutions must be
forced from the de jure power by some group deriving de .'facto
power from one or the other source. The analysis of the consequences of
colonisation of North America and South America also confirms
Olson's (2000) 'Roving and Stationary Bandits' thesis:
when a bandit (the ruler) is out there for a short time, he attempts to
extract all that he can (and therefore establishes institutions with the
extraction objective in mind); whereas if the bandit is in there to
settle down, he extracts only part of the income of his subjects--the
intact earning capacity of the subjects allows the stationary bandit a
steady stream of extraction, now as well as in the future.

3.4. Korea and Taiwan vs. Congo (Zaire)

In South Korea and Taiwan the leaders pursued developmental
policies while General Mobutu made Congo the most kleptocratic regime.
Acemoglu explains the reasons for the difference in choice of the
rulers. He believes that the explanation lies in
'constraints'--while Mobutu faced little constraints either
from its neighbours or from the existing institutions, South Korea and
Taiwan faced severe threats of communism via a revolution or invasion.

It was the threat of communist revolution from outside as well as
inside that forced General Park Chung Hee in South Korea and Kuomintang
regime, led by Chiang Kaishek, in Taiwan to pursue developmental
policies. Acemoglu believes that the primary motivation for investment
in education and the institution of land reforms in Korea was the
containment of unrest. The Kuomintang regime, the rulers of China before
the revolution, despite having a history of being corrupt, predatory and
rent seekers, were also forced to pursue the industrialisation path to
avert the threat of communism in their new shelter--Taiwan.

The situation in Congo was very different from Taiwan. In Congo,
General Mobutu, the then Army chief, took over power shortly after
independence. Mobutu dismantled the judiciary, removed the already weak
institutional constraint, bought political support using state resources
and proceeded to accumulate wealth. There were effectively no property
rights and the GDP of Congo declined at the rate of 2 percent a year.
How could Mobutu get away with this'? To ward off any threat to his
rule, Mobutu bought off political support using money provided by US,
IMF and World Bank as developmental aid which, in fact, were payments to
Mobutu to keep Congo noncommunist.

The lesson from the experience of Korea and Taiwan is that the
threat of a revolution may force the authorities to reform. Especially,
the threat of an ideological change may induce the authorities to
practise the ideology in vogue with more vigour thereby reforming the
institutions as a consequence. While the lesson from the experience of
Congo is that if the stronger world powers have common interest with the
rent seekers, it would constrain institutional development. Put
differently, this may also imply that if the world powers have some
strategic interests in a country, then it might be easier for them to
deal with a single person rather than a democratic regime. That single
person, drawing legitimacy from foreign powers rather than the citizens
of the country, will not be too bothered to facilitate growth-enhancing
institutional change.

4. ENLIGHTENMENT ERA

The 17th century is generally referred to as the European
enlightenment era. In the context of institution-building the single
most important contribution of the enlightenment thought is its
successful attack on absolute monarchy. The thoughts of the
enlightenment philosophers seem to have influenced institutional change
in a number of countries, especially the framing of the constitution in
the US seems to have benefited from the teachings of enlightenment
philosophers like Hobbes, Montesquieu and Locke. A brief on the thoughts
of the enlightenment philosophers is presented in Box 1.

5. FROM WHERE TO BEGIN?

The discussion in the foregoing sections was meant to draw lessons
for our main task, from where to begin the process of institutional
reform? Before we present our own arguments for Pakistan, it will prove
useful to briefly recap the lessons that we have learnt from historical
experiences, of different countries, discussed in Section 3.

5. 1. Can Commercial Interests in Pakistan Force the Dejure Power
to Change Institutions for the Better?

If the institutions are poor and the de jure power is not willing
to reform institutions on its own or has been held hostage by some de
facto power that stands to gain from maintaining the status quo, then
some other de facto power must emerge that can force change upon the
incumbent de jure power. This is what we learned from Acemoglu, et al.
(2005a). The experience of institutional change in 17th century UK and
the Netherlands as well as the significant difference between the
institutional evolution of North and South America in the 18th and 19th
century corroborates this stance.

How will the de facto power that may force the de jure power to
enact institutional change emerge? This is the issue. Can the
conmaercial interests, in Pakistan, emerge as the said de facto
power'? (As has happened in the 17th century UK). This is unlikely
because a rent-seeking culture has characterised the economy through
much of its history. For example, in the 1950s, the trade policy relying
on high tariffs and quantitative restrictions conferred windfall gains
on a small group of import licensees [Hussain (1999)], while in the
1960s, the import substituting industrialisation and the export bonus
scheme allowed the exporters to amass wealth at the expense of other
segments of the society. (11) In the 1980s and 1990s, the bureaucratic
and the political elite, and those who could afford to buy-off bank
officials, benefited from bank loans that in essence were mostly not
repaid. Given that large commercial interests in Pakistan, have
prospered by way of rent seeking (and are used to securing favours from
the de jure power), it is difficult for such interests to stand up
against the de jure power to reform institutions. After all one does not
bite one's own hand.

5.2. Can Fiscal Constraints Force the de jure Power to Strike a
Bargain with the Citizens for Taxation in Exchange for Good
Institutions?

Pakistan has faced fiscal constraints in the past and the situation
is no different today. Will the fiscal constraints force the de jure
power, as these had forced the de jure powers of UK and Netherlands, in
the 17th century, to strike an implicit bargain with the
citizens--taxation revenues in exchange for good institutions? Again
this is unlikely. The times when the fiscal constraints could force the
de jure power to strike a bargain with the citizens was when access to
funds was neither available through borrowing from the country's
central bank (money creation) nor through foreign aid. Now the
instrument of money creation has enabled the governments to delay the
day of reckoning till the people burdened with inflation decide to
revolt against the government (which does not happen too often). Second,
Pakistan because of its geo-strategic position, had enjoyed access to
sufficient foreign aid for the better part of its history. Given the
present geo-political environment, the trend is likely to
continue--foreign aid will alleviate the fiscal constraint and the de
jure power will not be too pushed for taxation revenues. The implicit
bargain i.e., taxation revenue in exchange for good institutions will
not materialise.

5.3. Strategic Interests of Foreign Powers: A Constraint to
Institutional Development

Will the Congo-like situation prevail in Pakistan, that is, will
the strategic interests of foreign powers constrain institutional
development in Pakistan? In fact, a Congo-like situation has prevailed
in Pakistan for the better part of its history. It goes without saying
that foreign powers, especially the United States, do have strategic
interests in Pakistan and the population of Pakistan in general does not
feel pressed to pursue the strategic interests of foreign powers.
Therefore it is in the interest of the foreign powers to buy off and
even install an autocrat or at best a sham democracy, and ensure
continuity of such rule. During its history of 61 years, Pakistan has
witnessed four military regimes. Three of the four military rulers ruled
for almost a decade each, with implicit or explicit support of the
United States. US' support to the military regimes in Pakistan,
despite its avowed criticism of dictatorship, bears testimony to the
'buy-off and rule' strategy. The regimes that derive
legitimacy from foreign powers rather than from the natives is not
pushed to pursue institutional reforms, especially when it means
shooting one's own self in the foot, e.g., judicial independence.

5.4. Will a Revolution Bring about Institutional Change in
Pakistan?

Revolutions are not spontaneous. All revolutions have their
thinkers whose thoughts ignite the revolutions [Masood (1991)]. The
monarchy in Europe did not collapse overnight. Around the time of the
Glorious Revolution (1688) in UK and much before the French revolution,
the enlightenment philosophers, like Montesquie, Spinoza and Voltaire
had launched a strong attack against monarchy with their pen and voice.
The thoughts of people like Allama Shariati and Ayatollah Mutahiri had
provided the fodder for the Iranian revolution of 1979 [Masood (1991)].
To stage a revolution that ends up in long-lasting institutional change
rather than chaos, not only the society should have developed sufficient
apathy with the present rule but it should also have at least some idea
of how to proceed after the revolution. Above all, if the human capital
required for carrying out the institutional change is not available,
even a revolution may fizzle-out or turn into chaos. To conclude, to
stage a successful revolution the belief system of the society must be
sufficiently influenced so that the society can perceive what wrong is
being afflicted upon it and how it can remedy the situation. The
question is, how can the beliefs be influenced?

We have shown that fiscal constraints and commercial interests may
not prove very effective in securing an institutional change in
Pakistan. Besides, given the strategic interest of foreign powers in
Pakistan, the possibility of foreign powers thwarting an institutional
change cannot be ruled out, if the change is likely to compromise their
interests. We have also discussed that given the obtaining intellectual
thought process and the state of the human capital, the society in
Pakistan may not be ready as yet to stage a revolution that ends up in a
meaningful institutional change. How to go about institutional change
then? The option that remains is the gradualist approach, strongly
advocated by Douglas North and implicitly evident in the works of Darron
Acemoglu and Dani Rodrik, to name a few.

5.5. The Gradual Approach

One of the key elements of North's theory of institutional
change is path dependence exhibited by institutions. This implies that a
quick-fix solution to poor institutions is not possible. We want to
re-emphasise here that revolutions that appear to have reformed
institutions with a big-bang, were rooted in the thought process that in
some cases had begun almost a century before the revolution actually
materialised, for example the influence of 17th century enlightenment
thought upon the French revolution and the framing of the US
constitution. Other key elements of North's theory that (i)
institutions are influenced by beliefs, (ii) that dominant beliefs
matter, (iii) the role of intentionality, and (iv) comprehension of the
dominant players, provide hope that institutional change can be
designed, but only with the process of change extending over sufficient
length of time. We consider below, whether North's theory of
institutional change can be put to practice by way of reform of the
educational system in Pakistan.

Institutions that get established, according to North, are a
function of beliefs of the society. To design an institutional change,
the task then is to influence the societal beliefs. The belief
formation, we have learned is a function of genetics, culture and human
environment. To recap, beliefs can be influenced only to the extent that
today's learning and experiences influence the culture and human
environment. Thus the beliefs that are conducive to desired
institutional change can be developed, by providing to the citizens, the
education and human environment which is conducive to the preferred
institutional change.

But it is not just the individual beliefs that matter; rather it is
the beliefs of the society that count. This means that in a more
homogeneous society the task of securing an institutional change would
be relatively less difficult. Here we need to recall the Engerman and
Sokoloff (2005) thesis, reviewed in section 3.3, that the homogeneous
societies that the US and Canada had facilitated the development of
pro-growth institutions in these countries while in South America the
presence of heterogeneous societies furthered the development of such
institutions that constrained opportunities for the poor and hindered
economic growth in consequence. The task then is to forge greater
homogeneity in society, which is secured by forging convergence in
beliefs amongst the individuals and the various sections of a society.

The question is how to forge belief-convergence? Beliefs, being a
function of learning and human environment, the answer lies in providing
a uniform learning system and environment for the whole society. How to
do that? The answer is: a uniform and universal education system for all
during the formative years of human life i.e., childhood and
adolescence. To design an institutional change then, the first and
foremost requirement is to have a single system of education for all
segments of the society, up to a certain minimum level, say till, Grade
12. By a single system, we mean that not only the curricula should be
the same, but the environment in schools and colleges should also be
more or less similar. Two students reading the same material and sharing
the same environment are more likely to have the same beliefs as well.
Individuals of a nation, who acquired the same education and have
experienced similar environment at schools, are more likely to forge a
homogeneous society--a pre-requisite for developing growth promoting
institutions.

Is Pakistan's prevailing educational system capable of
facilitating the development of a homogeneous society? To answer this
question, we examine below the educational structure in Pakistan.

At the school/college level, Pakistan follows four different
regimes that include: (i) the O/A level Cambridge system: the schools
and colleges that use this system follow the curricula prescribed by the
authority which manages the O/A level system in UK, (ii) the
English-medium private and public schools which follow the curricula
prescribed by the government, (iii) the Urdu-medium government school
system, that also follows the syllabi prescribed by the government, but
the courses here are taught in the national language--Urdu, and (iv) the
madressah system. The curricula of the madressah system are primarily
focused on religious education and little effort is made to impart
knowledge of secular subjects like science, mathematics and the arts.
Besides, the medium of instruction is mostly the national language,
Urdu. All the state-owned schools, that offer education at a negligible
fee primarily serve the poor and invariably use urdu as the medium of
instruction. It is note worthy here that higher education (i.e beyond
grade 12) is offered mostly in English language which is also the
working language in offices, whether in public or private sector.

Thus the poor, having gone to Urdu medium, state-owned schools are
at a disadvantage; their education makes them unfit for the job market.
Government's education policy-2009 acknowledges that white collar
jobs seem to be reserved for the graduates of English medium schools.
This, coupled with the fact that the majority still goes to government
Urdu medium schools, is bound to perpetuate inequality which in turn
facilitates the development of institutions that ensure elite dominance
and constrains economic opportunities for the poor. It is also obvious
that the population which is the product of diverse educational systems,
like that of Pakistan, is likely to develop beliefs that stand apart*
The society will be heterogeneous, rather than homogeneous required for
institutional change. To visualise how heterogeneity may constrain
institutional change, assume that all MPs in the national parliament are
educated till say grade 14, with the 50 percent of the MPs coming from
the Cambridge (O/A level) system and the remaining 50 percent from
madressahs. Will the majority of MPs in this kind of educated
parliament, share views on many issues'? It is no coincidence that
a more or less similar education for all, up to a certain grade, by and
large, is the norm ill the developed world that boasts of good
institutions. To make our case for common educational system stronger,
we again lean on North (2005):

"The process of learning is unique to each individual but a
common institutional/educational structure will result in shared beliefs
and perceptions".

Our case for reform of the educational system also finds support in
studies like Rajan (2006) and Azfar (2006). Rajan argues that
strengthening the institutions like property rights etc. may help
jump-start the economy for a while but the lack of endowments, like
education, will leave the poor unprepared for reforms. He cautions that
in this situation placement of pro-market institutions may fail to do
the trick. Azfar (2006) argues that the shared belief system, which a
universal educational system shall produce, will help bring about a
consensus among the population, about the acceptable and unacceptable
behaviour of the rulers and will therefore force-in an honest
government.

The hardest to reform amongst the educational systems being
practised in Pakistan is the madressah system. Madressahs are believed
to inculcate the so-called orthodox beliefs in pupils, (the perception
may or may not be true) and therefore attempts have been made, under
foreign pressures, to reform the system. Such attempts have not borne
fruit. The reason is that the objective has been to find a quick-fix
solution. Unfortunately such a solution does not exist--the clergy that
enjoys enough de facto power is not willing to yield. To address the
issue one has to account for who goes to a madressah and why. Is the
enrolment there by choice or is forced by circumstances. The madressahs
in Pakistan, not only impart religious education, free of cost, but also
offer food and shelter to the pupils. (The madressah system has been
termed as the biggest NGO in Pakistan). The madressahs are apparently
funded by charity money. Anecdotal evidence suggests that mostly the
wards of the poor are enrolled there. For the poorest of the poor, this
is the easiest way to feed their children. In Pakistan, with around 30
percent of the population living below the poverty line, the enrolment
on this count is not likely to be small. So the solution lies in
addressing the overall issue of poverty, which in any case is not an
easy one to tackle, before a number of institutions have been reformed.
An alternate is to enforce compulsory enrolment in the formal school
system, other than the madressahs. This again involves the cost of
enforcement, compensating the parents for whom the nonschool going child
is a bread-earner and of course tackling the opposition from the clergy.

The purpose of the foregoing discussion is not to offer a solution
but only to provide a glimpse of the hurdles involved, when one attempts
to reform the educational system.

The proposed common educational system also takes care of the next
element in North's theory: dominant beliefs matter. If all the
subjects of a country have gone through the same kind of education and
have faced more or less similar human environment, at least at schools
and colleges, then belief-convergence between dominant and non-dominant
players is likely. Still the beliefs of the dominant players would
matter but given convergence, the preferences of the non-dominant
players would be automatically, taken care of.

North's argument that comprehension of an issue of the
dominant players determines the kind of institutions that will be
developed to confront the issue, again provides room for the education
to influence an institutional change, because it is the education, and
of course the right kind of education, that would influence a
person's ability to correctly comprehend the issue at hand.

That the dominant beliefs matter and that the intentionality of the
dominant players matters as well calls for choosing such people (through
electoral process etc.) to hold de jure power, who share the beliefs of
the society and who intend to allow the kind of institutions that the
society prefers. The beliefs and intentions of the candidates aspiring
for the de jure power can be tracked from a run down of the personal
profile of the aspirants. For example, if the candidate or a political
party is running for a second term, the performance in the previous term
serves as a guide to judge the beliefs and intentionality of the
players. However, for the constituents to correctly perceive the beliefs
and intentions of the players, they must possess some education, whether
formal or informal.

But this is a truth-judgment kind of a thing to say that to reform
institutions to begin with, the educational system should be reformed.
The issue is who would bell the cat? The natural candidate, in this
context, is the de jure power. But the question is what motivates the de
jure power to do this. The reform of the educational system, we expect,
would reduce the voters' ignorance and thereby lead to all-round
institutional reform, including the change in the very structure of the
de jure power or the change in the de jure power itself. Given the
damage that the reform of the educational system can inflict upon the
rulers, why would the de jure power shoot at its own foot'? So, it
is difficult to believe, if not naive, that the de jure power will
undertake the reform of the educational system on its own.

To reform, the pre-requisite implicit in Acemoglu, et al. (2005b)
is that some de facto power must force the de jure power, to reform
institutions. This begs the question how such a de facto power will
emerge. What incentive mechanism will facilitate the emergence of a de
facto or de jure power, that may push for the reform of the educational
system? This is a difficult question to answer; the popular print and
electronic media may create awareness about the need for a common
educational system. But the question then is; what motivates the media
to do this'?

We have groped in the dark, perhaps without success, to find out as
to what, and who would trigger the reform of the educational system.
However one thing is for sure. Reform of the educational system would
meet lesser resistance as compared to reform of the other institutions.
For example, an attempt to begin the process of institutional reform
with the change in the structure of de jure power or the change in the
de jure power itself will, in all likelihood, be resisted tooth and
nail, by those who currently wield de jure power. Moreover if the change
in de jure power is likely to adversely influence interests of strong
foreign powers, then securing a change would become all the more
difficult. The support extended to the kleptocratic regime of General
Mobutu in Congo to thwart communism is just one example of how and why
foreign powers may support a corrupt regime rather than encourage
growth-conducive institutional change. The case of Pakistan is no
different. To further their own strategic ends, the foreign powers, that
matter, have comfortably co-existed with at least three military
regimes, in Pakistan. Similarly an attempt to establish institutions
that do not allow rent-seeking, again may not be successful if the de
jure power itself is deriving rents. It is noteworthy that all the
reforms referred to above will adversely influence the de jure power
today.

In contrast, given path dependence, the reform of the educational
system will, at best, influence the de jure power a generation hence.
Typically, politicians being myopic, with the vision extending only up
to the next elections, are not likely to be as scary of the reforms in
educational system than they would be of the change in de jure power
today, or the reform of any other institution that adversely influences
their fortunes in the near-term.

Therefore the educational system, with its all-encompassing
influence, global emphasis and relatively lesser resistance from the de
jure power stands as the best candidate to begin the process of
institutional reforms. The reform of the system and the increase in
literacy rate will in all likelihood lessen, if not altogether
eliminate, voters' ignorance and misperceptions while voting. This
would raise the possibility of choosing the right kind of people to hold
de jure power. Secondly given the voters' improved ability to
choose, they are more likely to choose the ones who share their belief
system. Thirdly, the rulers, having passed through the same educational
system as available to the subjects, are more likely to carry the same
beliefs as held by the subjects. It is the shared belief system that
will facilitate reform of the remaining institutions.

To understand why educational reforms should enjoy primacy over
other reforms, let us look at the case of United States--one of the
countries that can boast of good institutions today. Perhaps United
States had the highest literacy rate in the world at the beginning of
19th century. The common school movement that began in 1820 did such
good that by the middle of 19th century nearly 40 percent of the school
age population had been enrolled and nearly 90 percent of the white
adults were literate [Engerman and Sokoloff (2002)]. United States is
perhaps one country where making of the constitution was debated by way
of writing as many as 89 academic papers--now referred to as the
'Federalist Papers'. This was in 1870s. The relationship
between literacy and institutional change, evident from the constitution
making process of United States, is too apparent to be missed out.

A more recent evidence of the relations between literacy and
reforms is furnished by Paul Collier in 'Bottoms Billions'.
Collier (2007) argues that "countries need a critical mass of
educated people in order to work out and implement a reform
strategy" and substantiates it with the case of China and Tanzania.
The author suggests that China and Tanzania both failed under Mao Ze
Dong and Julius Nyerere respectively but given the critical mass of
educated people, China was able to rethink its development strategy
while Tanzania was not fortunate enough to have that critical mass.

We have determined that in a heterogeneous society, the
elite-dominated de jure power will not facilitate the development of
growth-promoting institutions. Despite some useful debate, we failed to
conclude that how such a de facto power may emerge, that can force the
de jure power to reform institutions. Given the inconclusive debate on
the emergence of the requisite de facto power, the question arises, do
we gain anything from the simple awareness that the educational system
should be the first one to be reformed, if the society cannot force the
de jure power to reform the system? The answer is, yes. Suppose that the
discontent in a country has reached a point where for the rulers to
remain in power they must agree to one or the other institutional change
demanded by the society, otherwise they face the threat of a revolution.
It is at this point that the society should have a clear idea as to what
kind of institutional change to demand. If the de jure power is deriving
rents from a host of avenues and the society demands an immediate end to
rent-seeking then the probability of acceptance of the demand is rather
low as this will affect the fortunes of the de jure power of today. But
if the society demands that all children aged five should receive
similar education, then the possibility exists that the ruler, being
myopic and faced with discontent and threat of a revolution, even though
weak, will yield. History stands witness that a couple of
Pakistan's rulers, faced with public discontent had, in their
twilight days, made an attempt to strike a bargain with the populists if
not the public. It is at this moment in time that society should be
aware of what it should demand? The demand should be: introduce a
uniform educational system, for all and sundry.

6. CONCLUSION

We set ourselves the task of finding answers to two questions. One,
is it possible to reform institutions by design and if yes which
institution should be chosen to be the first one to be reformed. Given
the path dependence exhibited by institutions, it is not possible to
reform institutions with a big bang i.e. in one-go. This leaves us with
the alternative of practising gradualism in reforming institutions--the
alternative preferred by North, Acemoglu and Rodrik. Once we decide to
adopt the gradual approach, the immediate issue that comes to the
forefront is what to reform first? Hence our second question, i.e., from
where to begin?

We excluded the possibility of commercial interests, fiscal
constraints and a revolution forcing an institutional change in
Pakistan. Commercial interests in Pakistan have typically thrived on
favours from the de jure power and are therefore unlikely to emerge as a
de facto power against its patron. Theoretically, fiscal constraints may
encourage the government to strike a bargain with the citizens i.e.,
taxation revenue in return for good institutions. But in practice, the
de jure power will enter into bargain only if funds from other sources
are not available. Given the strategic interests of foreign powers,
foreign aid will alleviate the fiscal constraint and the rulers-citizens
bargain will fail to materialise. The country does not seem ready for a
revolution either. The thought process that typically precedes
revolutions seems to have barely begun. The alternative, that remains
then is the gradualist approach preferred by North, Acemoglu and Rodrik.

Based on North's theory of institutional change we took the
position that institutions can be reformed by conscious design. North
holds that institutions are a function of the beliefs of the society and
that beliefs among other things are a function of one's learning
and experiences. He also holds the view that it is the beliefs of those
in a position to enact institutional change that matter. Thus it is
possible to mould one's beliefs by influencing what a person learns
and what he experiences. Change in beliefs, would then induce an
institutional change. The notion of the human mind, at the time of
birth, being tabula rasa (erased board) put forward by the enlightenment
philosopher, John Locke, also supports our stance that education can
shape beliefs to suit one's end. Therefore we concluded that
institutions can be reformed by conscious design.

The answer to our second, but the main question is that among the
list of institutions that call for reform, the reform of educational
system should top the agenda. Educational system as the top-most
candidate for reform meets the three point criteria laid down in Section
1 of the paper. The current diverse educational systems serve to create
and perpetuate inequality and population heterogeneity. We proposed the
introduction of a common educational system, for all and sundry, up to a
certain minimum level, say grade 12. The argument being that the
introduction of a common educational system will reduce inequality and
foster homogeneity in population, which in turn will facilitate
development of growth-promoting institutions. In a relative sense, the
resistance to reform of the educational system i.e. resistance to
establishment of a common education system, up to grade 12, is likely to
be lesser than a direct attack on rent-seeking of the de jure power. The
former would affect those who wield de jure power, a generation-hence,
while the latter will adversely influence them today. The politicians,
being myopic, will opt for the former rather than the latter.

The educational system, as the top-most candidate for reform, also
lives up to the second and third element of our criteria of choosing the
first institution to be reformed. The common educational system will
bring about convergence between the beliefs of the masses and those in
position to enact institutional change. With the rulers and the subjects
sharing beliefs, bringing about a change in the remaining institutions
shall be less difficult. Thus the introduction of a common educational
system will not only have an all-encompassing influence but the impact
will be long-lasting as well.

We learned that a de facto power must emerge to force the de jure
power to reform but failed to conclude how the said de facto power will
emerge. Given that we do not know as to who will bell the cat, does it
pay to be aware that the educational system should be the flag bearer of
all institutional reforms. The answer is; yes it pays. Occasions do
arise, when even a powerful dictator stands weakened and can see the
eminent threat to his rule. It is at times like these that if the
society has a clear idea of what kind of institutional change is
necessary, it can make the ruler yield. The demand of the society at
moments like these should be for establishing a common educational
system, for all and sundry, up to grade 12.

To conclude, we want to re-emphasise that we do not expect the
reform of the educational system to be impediment-free. One reason why
we recommend educational system as the foremost candidate for
institutional reform is that we expect such reforms to face relatively
lesser resistance. While evaluating our recommendation, the relative
nature of the word "lesser' should not be lost sight of.

We have identified 'commercial interest' and the
'need to generate revenue' as the inappropriate levers of
institutional change in Pakistan. More such areas can be explored, e.g.
social protection and greater federalism. We leave this for future
works.

Authors' Note: We are grateful to Aurangzeb Hashmi, Lubna
Hasan, Zafar Mahmood, Mahmood Khalid, Musleh ud Din, Rizwana Siddiqui,
Usman Qadir, Nasir Iqbal and other participants of the seminars on this
subject at PIDE and at a departmental meeting in PIDE, for offering very
useful suggestions and comments. We are also thankful to the two
anonymous referees whose valuable comments helped improve the paper. All
errors and omissions are ours.

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and S. Durlauf (eds.) Handbook of Economic Growth. North Holland.

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Decade of Empirical Research on Growth? It's Not Factor
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Long Run Paths of Development. (NBER Working Paper 11057).

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and Paths of Development among New World Economies. (NBER Working Papers
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on the History of Land and Reform in Pakistan. Available at:
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the Eyes of Civil Servants. Governance Series. Islamabad: Pakistan
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(7) Only newspaper reports are available as reference on the
subject. The events are too recent to have found mention in journal
papers and other reports.

(8) For exposition of North's theory of institutional change,
we draw heavily upon North (1990, 2005).

(9) The Chief Justice was deposed for not yielding to the wishes of
the former dictator and his restoration is now being popularly
considered as a symbol of allowing the judiciary to function
independently.

(10) For this section we draw upon Acemoglu, Lecture notes.

(11) For an exhaustive account of rent-seeking reading through the
host of books written on Pakistan economy is essential. These include
Zaidi (2005), Amjad (1982), Hussain (1999).

M. Idrees Khawaja is Associate
Professor at the Pakistan Institute of Development Economics, Islamabad
and Sajawal Khan is Junior Joint Director,
State Bank of Pakistan, Karachi.

Box 1
The Enlightenment Era
Hobbes (1588-1679) was probably the first to argue that monarchs
ruled not by the consent of Heaven, but by the consent of the
people. Hobbes held that all human beings, being selfish will fight
for resources. Therefore to protect individuals from each other,
humanity at some early point agreed to a 'social contract' that
specified the rules, individuals would live by. Hobbes reasoned
that as human beings cannot live by their agreements, therefore
authority was created to enforce the terms of the 'social
contract'. By authority Hobbes meant 'monarchy'. For Hobbes,
'humanity is better off living under the circumscribed freedoms of
a monarchy rather than the violent anarchy of a completely equal
and free life'. However, later on, in a twist of fate, his methods
of inquiry as well as his basic assumptions became the basis, for
arguments against absolute monarchy. Marquis de Montesquieu
(1688-1755), a judicial official as well as a titled nobleman, was
amongst the earliest critics of absolute monarchy. Montesquieu's
classic, The Spirit of Laws (1748) recognises geographic influences
on political systems, advocates checks and balances in government
and defends liberty against tyranny in an uncompromising manner.
Baruch Spinoza (1632-1677) held the view that human beings'
inability to preserve themselves forced them to form societies. In
doing so, the individuals surrendered their 'individual right' to
'common right'--a notion very similar to Hobbes' 'social contract'.
Spinoza held that an inverse relationship existed between the power
of an individual and the power of the State. Given this view
Spinoza argues for democracy to create a balance of power between
the state and the 'individual'. John Locke (1632-1704) views human
mind as completely empirical, rather, he argues that the only
knowledge is empirical knowledge. He also held that human mind at
birth is a tabula rasa (erased board). His empiricism coupled with
the notion of tabula rasa meant that moral as well intellectual
outcomes in human development can be altered to societal advantage
by changing the environment through education. Locke proposed an
extension of education to every member of society. His view of
education dominates the western culture even to this day. Voltaire
(1694-1778) popularised Newtonian science, fought for freedom of
the press, and actively crusaded against the Church. In his
endeavours he turned out hundreds of plays, pamphlets, essays and
novels. He wrote around 10,000 letters to different people in
advocacy of his convictions. Even in his own time, he enjoyed the
reputation of a legend, among kings as well as literate commoners.

Countries that experienced Lessons from Historical
institutional change versus Experiences
countries that (with similar
circumstances) that did not
experience institutional change
17th century Britain and Fiscal constraints and then
Netherlands versus Spain and commercial interests forced the
France crown in LJK to yield good
institutions. Similarly in
Netherlands commercial interests
emerged as the de facto power
that forced the change upon the
rulers.
19th century Britain and Germany Rent-seekers will thwart
versus Austria-Hungary and Russia institutional change, with
success depending upon the
bargaining strength that they
enjoy.
18th and 19th century North 1. Institutions are a function of
America versus South America initial endowments of a nation.
Extreme initial inequality and
populations heterogeneity leads
to development of institutions
that restrict opportunities for
the poor and thus constrain
growth.
2. Economic interests enjoy
primacy, if the de jure power is
with the elites; it will not
reform on its own. Some de facto
power must emerge to force change
onto de jure power
Korea and Taiwan versus Congo 1. Lesson from the experience of
(Zaire) Korea and Taiwan: the threat of a
revolution may force the
authorities to reform.
2. Lesson from the experience of
Congo: If the world powers have
some strategic interests in a
country then it would be easier
for them to buy-off/install some
rent-seeking rulers in the
country concerned rather than a
democratic set up. This may
constrain institutional
development in the country
concerned.